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This edition was written by Sarah Ahmad, Emily Araujo, Chase Parry, Andrew Rosin, and David Wessel.
Do climate stress tests influence bank lending to carbon-intensive (“brown”) firms even if the test results aren’t made public and don’t affect capital requirements? Valentina De Cicco of the European Bank for Reconstruction and Development, Isabella Gschossmann of Imperial College London and Christoffer Kok of the European Central Bank find that they do. After the 2022 ECB climate stress test, banks with stronger climate risk management—measured by higher scores on the ECB’s governance, strategy, risk management, and disclosure assessment—cut lending to brown firms more sharply than banks with weaker practices. Because these firms face both higher costs and greater risks in transitioning to lower greenhouse gas emissions, they are less attractive to banks with stronger climate risk oversight. The authors recommend enhancing banks’ capacity to conduct climate risk stress tests and strengthening oversight for weaker performing institutions.
Young Soo Jang of Pennsylvania State University and Sharjil Haque and Jessie Jiaxu Wang of the Federal Reserve Board show that in times of monetary tightening, banks often redirect funds from corporate borrowers towards private credit institutions such as business development companies (BDCs) — nonbank lenders to large and mid-sized firms that receive more favorable treatment under regulatory capital rules than banks receive for making loans. When banks reject new corporate debt applications, firms turn to these BDCs, paying sizable rate premiums that are then passed on to those original corporate borrowers. This “indirect credit supply mechanism” helps sustain overall lending volumes and mitigates contraction during periods following Fed rate increases but also raises borrowing costs and weakens firms’ ability to service debt, thereby raising system-wide risk.
Following the Great Recession, consumer spending lagged behind levels predicted by household wealth and income. Samara Beach, William Gamber, and Patrick Moran of the Federal Reserve Board argue that the rising concentration of wealth among the highest-income households largely explains this divergence. They find that the marginal propensity to consume out of wealth—the change in an individual’s spending following an increase in wealth—was stable around 3.3 to 3.4 cents on the dollar during the 1990s and early 2000s, but began to decline rapidly in the late 2000s, before eventually stabilizing at just under 2.7 cents on the dollar around 2016. Meanwhile, the share of wealth held by households in the top income quintile rose dramatically, increasing by 10 percentage points between 1989 and 2024. These high-income households, the authors find, have a significantly lower marginal propensity to consume out of wealth: 0.8 cents on the dollar for households in the top 20% of the income distribution compared to 7.5 cents on the dollar for households in the bottom 80%. Accounting for both the rising concentration of wealth and the lower marginal propensity to consume among the highest-income households allows the authors to closely predict the observed decline in consumer spending post-2012, explaining 88.7% of the slow recovery in consumer spending following the Great Recession.
"As many as two-thirds of card payments are processed by non-European companies. When you pay by card, our banking sector and payment service providers pay them fees. In addition, mobile payments are expanding their market share and when you pay with a mobile device, banks are losing fees and data. And we know that stablecoins – which are mostly denominated in dollars – are coming, which could take deposits away from banks. This would be a further step toward a deeper dependency of Europe on foreign providers," says Piero Cipollone, Member of the European Central Bank's Executive Board.
"This dependency is a concern for the central bank, as the resilience of payment systems is one of the mandates of central banks. We want to make sure that Europeans can pay independently of other regions of the world, so that we have the means to lead a normal life even if something happens outside the euro area. Right now, we do not have that certainty."
"We should be masters of our own destiny...We have had a common currency for 25 years, but when we wish to use it online, we depend on somebody else. This is a concerning situation. And we need to fix it. Just to give you an example: if we do the digital euro, this means that Europe will have a unified infrastructure and a common standard for payments. Payment service providers are very innovative. For example, in Slovenia you have Flik and they tell me that it is a very good solution for paying….So why cannot Flik expand outside Slovenia? It is a good solution and people can use it, but the difficulty is the standards. If you have different standards in different countries, it is very difficult for small companies to expand abroad, even if they are very innovative. It is like having to face different languages. But if you have one single standard, one language in common, it is much easier for you to sell your product. That is what we should care about: creating an environment where our companies can compete, grow and become big."
About the Hutchins Center on Fiscal and Monetary Policy at Brookings
